Ch08 - Chapter 8: Possibilities, Preferences and Choices...

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Chapter 8: Possibilities, Preferences and Choices Objectives: Describe a household’s budget line and show how it changes when prices or income change Make a map of preferences by using indifference curves and explain the principle of diminishing marginal rate of substitution Predict the effects of changes in prices and income on consumption choices Predict the effects of changes in wage rates on work-leisure choices
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Consumption Possibilities Household consumption choices are constrained by its income and the prices of the goods and services available. The budget line describes the limits to the household’s consumption choices.
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Consumption Possibilities Figure 8.1 shows Lisa’s budget line. Divisible goods can be bought in any quantity along the budget line (gasoline, for example). Indivisible goods must be bought in whole units at the points marked (movies, for example). Lisa can afford any point on the budget line or inside it.
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Preferences and Indifference Curves An indifference curve is a line that shows combinations of goods among which a consumer is indifferent . Figure 8.3(a) illustrates a consumer’s indifference curve. At point C , Lisa consumes 2 movies and 6 six-packs a
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Lisa can sort all possible combinations of goods into three groups: preferred, not preferred, and indifferent. An indifference curve joins all those points that Lisa says are just as good as C . G
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This note was uploaded on 04/03/2009 for the course ECON 2102 taught by Professor Bill during the Spring '08 term at Temple.

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Ch08 - Chapter 8: Possibilities, Preferences and Choices...

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